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Whole Foods’ Paycheck May Hinge on Prices

5-27-2014 1-22-02 PMThe recent announcement by Whole Foods to revise its earnings outlook has investors worried about the price of its stock. I think they should be paying more attention to the prices on its shelves.

A blog item in the Harvard Business Review examines two events that caused Whole Foods to revise its sales and earnings projections for the third time in six months. The first cause, competition, is coming not only from natural chains including Sprout, but also major rivals such as Kroger, Target and Walmart, many of which offer private label organics that are price competitive.

Which leads to the second cause of Whole Food’s problems: It has, as author Rafi Mohammed put it, a “poor pricing image problem – the rather unflattering ‘Whole Paycheck’ moniker – which it needs to and can reverse.”

True enough, the company is aware of, and trying to fix, the problem. But an interview with co-CEO John Mackey indicates that the approach is more product-specific than holistic – cut prices on a few items and people may buy more. The problem with that approach is it doesn’t quickly solve the broader perception issue: Many people simply avoid Whole Foods based on the belief – not firsthand experience – that it is too expensive. Yet its house brand, 365 Everyday Value, is price competitive.

When pricing becomes a problem that hinders operations, it can be resolved solely by analyzing category and SKU level information, but that is not the optimal path. Real insights into a pricing strategy occur when the company takes the same product movement data and connects it to the customers actually making the purchases.

Whole Foods would be better off with this approach because it would then understand the underlying dynamics of how its customers shop and how specific item pricing affects not only the movement of the individual product but also of adjacencies that are more subtle and harder to pick up in traditional basket-level analysis. For example, higher prices on one item may prevent the customer from buying a complementary product on that shopping trip, effectively doubling down on the problem.

The insights can, on another front, also inform Whole Foods on the needs and preferences of its regular and not-so-regular customers, so it can identify the items shoppers are willing to spend more on, and those they purchase based almost entirely on price. These items could surprise you. A shopper may not budge on a brand of tea, but will easily switch cereals to save 30 cents.

Once a pricing strategy is developed, Whole Foods can incorporate it into the features that remain true to the brand and define its inherent value – features such as quality food, knowledgeable staff and easy-to-navigate stores.

People line up and buy at Whole Foods because it stands for more than food, so simply dropping prices doesn’t solve its perception issue. Rather, it should view pricing as an opportunity to shape the full customer experience – price, advice, product preparation and product assortment. In other words, give shoppers a reason to want to pay more (an exclusive experience), and deliver value where it needs to be evident.

And since I brought it up, let me emphasize that assortment is a dominant factor. Many major, and not-so-major, grocers may be adding organics, but Whole Foods’ deeper product mix and data should give it a head start in optimizing its own assortment.

This leads us back to price, because unique products and unique experiences translate to reduced price pressure, and that is on the shelf as well as on Wall Street.

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